Wednesday, September 24, 2008

Why Congress Should Oppose the Bail-Out Package

Let's go through all the arguments against this package.

Let's start with the text of the deal:

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Note all of the authority given to the Treasury secretary. He buys and sells securities at terms he deems necessary. He appoints firms to be "financial agents of the government." He creates any vehicles used to deal with this mess. In short, he is given a huge swath of power to handle this mess.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

He makes literally no reports to Congress. After three months and then "semi-annually thereafter." That is way too much time between reports. Also note there is no mention of what information he is supposed to present to Congress. The Treasury Secretary could come into Congress with nothing -- no reports, not facts, no stories to tell -- and be in compliance with this act.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Did you catch that? There's a great little language shift. The Treasury Secretary's authority is limited to $700 billion outstanding at any time. That means he could buy $700 billion -- then sell some at a loss -- and then buy more to get back to $700 billion. This is a revolving credit line, not a firm upper limit. It's conceivable the Treasury could but and sell trillions of dollars under this authority.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Excuse me? What country are we living in? Paulson could grant total authority to, say, Goldman Sachs (his former employer) and we the taxpayer would have nothing to say about it.

Folks, this is a boondoggle for several reasons.

1.) There is no oversight. Period. No one should be given this amount of power without any check and/or balance.

2.) Why this huge dollar figure?

“One of you mentioned that you will use about $50 billion dollars a month. If that’s the case, and you’re certainly not going to use all $700 billion immediately, and as you can see there are a lot of questions about whether this will work, we understand you’ve done your best and you think this will work best, but it’s clear we’re in uncharted waters. But what about doing this in tranches? Why couldn’t you ask us for $150 billion, and on January 15th or January 20th we would come back, we would assess how this worked and grant some more money if it’s really working?”

He's asking for 25% of the 2007 federal budget in one fell swoop. That's a ton of cash.

3.) Bernanke's statement regarding purchase prices yesterday is pure crap:

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''

Really? I've been involved with finance for 15 years, and I have never heard this distinction before. When I was a bond trader, I do remember getting calls at the end of the month asking for bids on bonds because clients had to mark their portfolios to market. But I don't remember anybody every saying, "let's mark this to "hold-to-maturity." This distinction is bullshit, plain and simple.

This is a huge boondoggle waiting to happen. If we give all of this authority to the Paulson we will live to regret it in a big way. And so will our children.

A friend of mine (New Deal Democrat over at Economic Populist) made an observation. Over the weekend we saw people in Congress "shocked" by what was happening. Paulsona and bernanke also qualify as the "deer in the headlights" for this mess. In other words -- everybody who should have seen this coming is now shocked we're in this mess. The only people to get this right were the bloggers -- or as NDD says, the "dirty hippies." Now, these same people who have gotten nothing right over the last year are desperately seeking money to help stave off a disaster. These people have no credibility on this issue. None. Nada. Zip. Zero.

Please call your Senator and Representatives and tell them to vote no on this piece of legislation unless there are major revisions.